The long-awaited rate cut has finally arrived. Markets reacted very positively to the end of the Federal Reserve’s monetary tightening campaign. But the euphoria was only fleeting. Friday’s trading raised fresh concerns about corporate profits and economic growth.
Stocks, however, posted gains overall for the week. The S&P 500 (^GSPC) ended the week up about 1.4%. The Dow Jones Industrial Average (^DJI) gained 1.6%, while the Nasdaq Composite (^IXIC) gained 1.5%. While the S&P fell on Friday, the index hit an all-time high earlier in the week and the Dow closed at a record high.
The most important question for investors this week is whether a new batch of data supports Fed Chairman Jerome Powell’s assertion that the U.S. economy remains strong. Second-quarter GDP figures, due Thursday, will provide some evidence that that assertion is true.
Fed Chairman Jerome Powell has also been careful not to declare a victory on inflation as price pressures continue to ease. Friday’s scheduled release of the personal consumption expenditures (PCE) index, the Fed’s preferred inflation gauge, will provide another progress report on that front.
Also on deck are quarterly earnings reports from Costco (COST), Micron (MU) and Accenture (ACN).
What’s next for the Fed?
The quiet period is over, and so is monetary tightening. The public is likely to hear more commentary from Fed officials in the days following the dramatic shift away from tight monetary policy. Perhaps the biggest question for policymakers is where we go from here.
At least eight central bank officials, including Powell, Federal Reserve Vice Chairman for Supervision Michael Barr and New York Fed President John Williams, are expected to speak or attend conferences in the coming days, likely to reinforce the Fed’s decision to cut interest rates by 50 basis points. Fed officials are planning two more 25-basis-point rate cuts this year, followed by four more in 2025.
Powell said the central bank was not trying to catch up with a deeper rate cut, responding to criticism that the Fed should have cut rates at its last policy meeting in July. He also said 50-basis-point cuts should not be considered the new norm. But a deeper slowdown in the labor market could undermine both of his assertions.
Learn more: The Fed Rate Cut: What It Means for Bank Accounts, CDs, Loans, and Credit Cards
New risks and old ones
Inflation was so high and the jobs market so tight that the Fed focused solely on reining in rising prices for the past two years. But now that inflation is slowing and the jobs market is showing signs of slowing, the Fed must advance its mandate on both fronts.
On Wednesday, Powell noted that upside risks to inflation had diminished while downside risks to employment had increased. “We know it’s time to readjust our policy,” he said, confirming that the balance of risks was “now balanced.”
Analysts expect Friday’s PCE reading to come in at 2.3% year-on-year, down from a 2.5% annual increase the previous month, according to Bloomberg data. Such a favorable indicator would continue the decline and confirm the Fed’s decision.
But even as the labor market comes under increasing scrutiny, the Fed has still not met its 2% inflation target. And as central bankers have repeatedly said, easing the brake too soon could allow inflation to rise again.
As analysts at Bank of America Global Research pointed out in a note published Friday, “with growth above potential, consumption strong and the stock market at record highs, such a bold start to an easing cycle is hard to justify if a recession is not imminent.”
“Unless the Fed sees something we are missing, a more aggressive easing cycle could make it harder to reach the 2% target given the uncertainty ahead, including the implications of the US elections,” they wrote.
Resetting technology actions
Tech investors are looking for their next catalyst, and the Fed may have just given it to them. After a mixed earnings season that saw Wall Street largely demoralized by massive AI spending and impatient with less-than-perfect quarters, the rate-sensitive sector could be back on the rise.
All but one of the “Magnificent Seven” stocks posted gains last week, with Meta (META), Apple (AAPL), Alphabet (GOOG, GOOGL), Amazon (AMZN), Microsoft (MSFT) and Tesla (TSLA) all outperforming the broader market. Nvidia (NVDA), the lone loser, was down more than 2% last week as volatility pushed it higher after a dramatic surge in the spring and summer. Yet some analysts see a more nuanced picture. As Scott Chronert, head of U.S. equity strategy at Citi, has warned, the upside potential for even the best-performing tech stocks is limited as it becomes harder to match their past growth.
Weekly calendar
Monday
Economic data: S&P Global US Services PMI, September (48.5 expected, 47.9 previously); Chicago Fed Nat Activity Index, August (-0.20 expected, -0.34 previously)
Earnings:No notable benefit
Tuesday
Economic data: S&P CoreLogic Case-Shiller 20-City Composite Home Price Index, Month-to-Month, July (0.42% previously); S&P CoreLogic Case-Shiller 20-City Composite Home Price Index, Year-to-Year, July (6.47% previously); Conference Board Consumer Confidence, September (102.8 expected, 103.3 previously)
Earnings:AutoZone (AZO), Thor (THO), KB Home (KBH), Worthington (WOR), Stitch Fix (SFIX)
Wednesday
Economic data:MBA Mortgage Applications, Week Ending September 20 (14.2% previously); New Home Sales, August (693,000 expected, 739,000 previously); Month-over-Month New Home Sales, August (-6.3% expected, 10.6% previously)
Earnings: Micron (MU), Jefferies (JEF), Cintas (CTAS)
THURSDAY
Economic data: Q2 GDP, second revision (+2.9% annualized rate expected, +3% previously); Q2 personal consumption, second revision (+2.9% previously); Initial jobless claims, week ended September 21 (219,000 previously); Durable goods orders, August (-2.9% expected, 9.8% previously)
Earnings:Costco (COST), Accenture (ACN), BlackBerry (BB), CarMax (KMX), Jabil (JBL)
Friday
Economic data:University of Michigan Consumer Sentiment, September Final Results (69 previously)
PCE inflation, month-over-month, August (+0.1% expected, +0.2% previously); PCE inflation, year-over-year, August (+2.3% expected, +2.5% previously); “Core” PCE, month-over-month, August (+0.2% expected, +0.2% previously); “Core” PCE, year-over-year, January (+2.7% expected; +2.6% previously)
Earnings:No notable benefit
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